Survey: Slow gains ahead

Friday

Oct 29, 2010 at 2:00 AM

WASHINGTON — The job market and the economy will improve only slightly next year, according to an Associated Press survey of leading economists whose outlook for 2011 has dimmed over the past three months.

THE ASSOCIATED PRESS

WASHINGTON — The job market and the economy will improve only slightly next year, according to an Associated Press survey of leading economists whose outlook for 2011 has dimmed over the past three months.

In their view, shoppers and employers will stay cautious. Households will keep saving. Inflation will remain tame. And unemployment will dip only a bit from the current 9.6 percent rate to a still-high 9 percent at the end of 2011.

In the previous survey in July, the economists predicted unemployment of 8.7 percent at the end of next year. In the survey before that, they foresaw 8.4 percent. Some now think unemployment won't drop to a historically normal 5.5 percent to 6 percent until at least 2018 — several years later than envisioned earlier.

It adds up to a grim picture for the new Congress that begins in January. Voter frustration over unemployment is threatening to cost Democrats their control of the House, and maybe the Senate, in the midterm elections Tuesday.

The new Congress appears unlikely to approve more spending to try to invigorate the economy and the job market. And the Federal Reserve is running out of options.

Yet the economists the AP surveyed still expect the economy to sidestep some threats that had raised concerns in recent months. They dismiss the likelihood of a second recession, for instance, and they think the risk of deflation is remote. Deflation is a prolonged drop in prices and wages that can make people unwilling to spend.

Fed Chairman Ben Bernanke has expressed concern about deflation — one reason why the Fed will likely announce Wednesday that it will buy Treasury bonds to try to further lower loan rates. Lower rates might spur more borrowing and spending and help raise prices.

The economists are sharply split on whether the Fed should do so. And they overwhelmingly oppose another round of government stimulus spending. They think the economy will make steady gains, just more slowly than they had earlier thought.

The AP survey collected the views of 43 leading private, corporate and academic economists on a range of indicators, including employment, consumer spending and inflation. Among their forecasts:

The economy will expand just 2.7 percent next year, scarcely more than the tepid growth predicted for all of 2010. Under an economic rule of thumb, growth would have to average at least 5 percent for a whole year to lower the unemployment rate by 1 percentage point.

Shoppers will boost their spending 2.5 percent in 2011, slightly better than the increase that economists envision for this year. But spending would have to rise roughly twice that fast to deliver enough economic punch to lower unemployment. Three months ago, the economists were more optimistic about 2011: They predicted shoppers would boost their spending 3 percent.

Inflation will equal just 1.7 percent next year. That's slightly more than the 1.2 percent predicted for this year. And it's about the minimum level of inflation the Fed thinks a healthy economy needs.

Americans will keep rebuilding their savings, leaving less money for spending. They're expected to save 5.4 percent of disposable income next year. That's slightly less than the 5.7 percent savings rate predicted for all of 2010. But it's still near the highest savings rate since 1992.

"When you look to 2011, the words to describe the economy are glum, lousy, subpar," says Rajeev Dhawan, director of Georgia State University's Economic Forecasting Center.

What to do about it is the subject of dispute. Two-thirds of the economists surveyed say Congress should refrain from more stimulus spending. Some worry that such aid wouldn't be targeted effectively. Others say the extra spending would take too long to lift the economy. An overarching concern is that more government spending would widen the budget gap, already at $1.3 trillion.

Even the Fed's expected move to buy more government bonds sharply divides the economists. Half agree that such purchases, if they further lower loan rates, would help nudge Americans to spend more, encourage more hiring and help boost the economy.

But the other half counter that further lowering already super-low loan rates would provide little benefit. Some liken it to "pushing on a string." And they say they fear that even lower rates could ignite runaway inflation later or a wave of speculative buying in commodities, bonds or other assets.

Whether or not Congress or the Fed takes effective action, Robert Roach and nearly 15 million other unemployed Americans feel helpless.

"It's really easy to get discouraged," says Roach, who lost his job about a month ago as principal of the Heartland Christian Academy in Bemidji, Minn. Roach, 55, recently interviewed for a post as student services coordinator at a technical college. The competition included 160 job seekers like him.

Roach holds a doctorate in leadership development, along with a degree in chemistry. He and his wife, who works in a church office, have paid off their credit card bills. But they face payments on their home and a car. One of their seven children lives at home.

"This isn't just about the economy," says Roach, who lives in Blackduck, Minn. "It is about self-esteem. For those of us out of work, it's very easy to feel isolated and alone."

Even Americans who do have jobs still aren't confident enough to spend freely. Many are still pained by their loss of wealth since the financial crisis struck in 2008. Home equity has fallen sharply from its pre-recession peak. So has the value of stock holdings and retirement savings.

"American households lost $14 trillion of their net worth in the recent recession," said survey participant Albert Niemi, dean of the Cox School of Business at Southern Methodist University. "The loss in wealth, plus tight credit, will depress consumer spending for the next several years."

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